Tax loss harvesting by rotating ETFs

i may be mistaken, but what would this actually achieve? if your value is X and you buy in at X, then your basis will, effectively, be the same. are you saying your investment is already a net negative somehow? how long did you hold it before the loss?

*ETA: even if you're at a loss, you're buying in at a lower value so your basis will be lower than your expectation, raising your tax liability on the new investment. you think you're about to pick another loser? i think the actual losses will hurt yo more than whatever tax savings you're imagining

The whole idea is to minimize my short term tax bill. Specifically, I am looking at my holdings in Vanguard's Materials ETF, VAW. It is comprised of reputable large cap companies like Dow DuPont, Praxair, and Shermin Williams. This thing has gotten hammered 15-20% over the last couple of weeks and has pushed me into negative territory relative to my initial investment. So if I sell VAW and buy IYM (the iShares equivalent of VAW - it holds the same companies but in slightly different percentages), I could take a near term tax loss while maintaining exposure to that sector. Not really about picking winners or losers but about minimizing taxes while maintaining sector diversification in my portfolio. While I agree that you end up paying the taxes when the investment appreciates, I'm fairly certain that research suggests this approach of taking near-term tax losses juices tax-adjusted returns over time.

So my question is whether or not this would violate the wash-sale rule?

I understand the premise, but unless you are uber wealthy and were talking alot of money, it's not really doing that much for you. You can deduct 3k per year of ordinary income and carry an excess forward 5 years (I think).

This strategy makes way more sense for businesses where losses aren't capped

The rule is very vague and hasn't really been updated since it was created in the 30s or 40s- way before ETF indexing. To be conservative you want to use ETFs that track different indexes. For instance VOO and VV are both US large cap ETFs and have a correlation of .99 but track different indexes. A great resource is ETF.com. Just search for your original ETF and similar ETFs will be listed. You can see which underlying indexes are used to find TLH equivalents.

There are alot of misconceptions surrounding TLH but the short of it is you are not avoiding taxes simply deferring them.